American Elephants

Economics 101: Incentives Matter. by The Elephant's Child

Ten days ago, I wrote a post about how the attempt to redistribute wealth usually ends up redistributing the wealthy instead. When government becomes too eager for ever higher taxes and fees, those who are trying to protect what they have earned often pick up and move out of that government’s jurisdiction.

I was inspired by new French President Francois Hollande’s attempt to raise taxes on France’s wealthy to 75%. Imagine a government that allows you to keep just 25¢ out of every dollar you earn. That’s a pretty powerful incentive to move. The redistributors, however, always assume that people, poor saps, will just obey.

Thanks to U.S. tax rates — Obama’s insistence that ‘the rich’ have not been paying their ‘fair share’—has resulted in the number of Americans who tore up their passports in 2011 and left the country to move permanently overseas, was seven times higher than those who left in 2008. In the first three-quarters of 2012, more than 1,100 Americans renounced their citizenship and made their homes elsewhere, according to the  Federal Register. The available data for the fourth quarter of 2012 are not yet available, but on track to surpass the 2011 numbers.

There are 6 million American citizens living abroad and continuing to pay U.S. taxes. Expatriates increasingly abandon their citizenship over taxes. The U.S. is the only industrialized country that requires citizens living abroad to pay income taxes even if their income is generated abroad. The newly passed law concerning the “fiscal cliff”has increased the taxes on individuals earning more than $400,000 a year and married couples earning more than $450,000 to 39.6 percent, up from last year’s rate of 35 percent.

People and businesses respond to incentives. This is a very simple fact of life, yet liberals in particular and politicians in general seldom get it. They are sure that if they just raise your taxes, they will get more money. Doesn’t work that way. Often they get even less revenue.

Works the other way too. When you reduce taxes, particularly on businesses, but on individuals as well — you free people up to grow, attempt, invest, invent and develop to improve their lives and to follow their hopes and dreams. And when people are set free to grow, economies grow as well.

How very odd that Obama cannot grasp this simple basic economic concept. If his hope is to take away from the rich in order to help the poor, he’s wasting his time. The evidence, however, is even less encouraging. Those whom he expects to reward with the revenue garnered from the rich, are his supporters and the unions. That isn’t philanthropy, it’s graft.
(h/t: Gateway Pundit)


3 Comments so far
Leave a comment

When you look at the Obama obsession with raising taxes on the wealthy there are only two conclusions that leap forward to explain it:

(a) the man who has been described as the “smartest person in the room” is actually an idiot who will not or can not master simple economics


(b) Obama does understand that raising taxes will reduce overall economic activity, increase unemployment, foment civil unrest and potentially generate civil violence — and that’s exactly what he wants to have happen.

Either way Barack Obama will be remembered as the most ignorant or most duplicitous President the nation has suffered.


Comment by Jim Yardley

With nearly every action that Obama takes, you’re left wondering why? Economist Alan Reynolds said “Barack Obama doesn’t understand economics, and apparently he will not listen to anyone who does.” Early on, in his first term, Rahm Emanuel set up a daily economics meeting, probably because he recognized that Obama didn’ understand. Obama soon got tired of them and quit. He didn’t understand why the stimulus was not working immediately. And he has continued to believe in stimulus as the way to go.

Yes, you portray the debate quite accurately. I believe that he just doesn’t understand economics at all, isn’t particularly interested, and his ideology demands taxing the rich for “fairness.” I know others who think he knows perfectly well, and wants to bring the economy down, for his own ends.

The books that come out after his term is over are going to be very interesting.


Comment by The Elephant's Child

I do not understand it either. It makes just as much sense as climate change. If you understand the life cycle of carbon the physics of CO2 and the various energy waves how can you ignore climate change and the affects of fossil fuels on the climate.

How can you ignore economics 101?

Are we basing economics 101 on the following assumptions:
1. All participants have perfect information about the future.
2. There is perfect competition.
3. Prices are absolutely accurate and up to date.
4. Price signals completely reflect every cost to society. There are no externalities. (This is an important one for efficiency in society.)
5. Everyone is motivated solely by maximizing personal “utility”, often measured by wealth and income.
6. At the appropriate risk-adjusted interest rate, unlimited capital is available to everyone.
7. etc…

So who’s economic theories do we want to discuss?

Thomas Sowell and his theories on taxes?

The economic theories of Hayek,or Walras and his “Theorem of Maximum Utility”, or Vilfredo Pareto and his theories on market efficiency and the Arrow-Debreu model. Or maybe the theories of the “Prisoners Dilemma” or “Rational Irrationality”. Or maybe we should talk about George Akerlof’s paper “The Market for Lemons” regarding hidden information.

Should we divide all of the economist into conservative and liberal and throw out the liberal economist so we do not hurt our brain with cognitive dissonance?

So, for climate change there are to many variables but for economics everything is very clear because markets are rational and based on simple curves such as the Laffer curve which has no numbers on either the x or y axis.

If we are to have a consensus on climate change then why not economics? What is a consensus? 51% as in this past election.

If the people are smart enough to aggregate their decisions and pick winners in the market place then have they not aggregated their decisions on tax increases by electing Obama? Or, maybe they just do not understand all of the many economics theories or game theory that is involved in the free markets? Maybe they just have not read Ayan Rand? Of course the only thing that makes sense is that these people want something just like conservatives want something from politics.


Comment by Mark Baird

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: